In my previous article, I discussed whether it was better to reinvest your dividends directly with a company or if you should pocket the cash for your own purposes. The results were a mixed bag and no definitive statements were made. One of the comments inquired about reinvesting at the 52 week low vs. the 52 week high. The commenter was thinking along the lines of trying to time when you would want to reinvest. This article takes that idea one step further and looks at the results of reinvesting based on the current yield of the stock at the time of the ex-dividend date. The current dividend yield is defined as the dividend amount annualized (times 4 for quarterly payers or 12 for monthly) divided by the current stock price.
The companies to be examined for this article will be the same list as before - American Capital (NASDAQ:ACAS), Apollo Investments (NASDAQ:AINV), Ares Capital Corp (NASDAQ:ARCC), Blackrock Kelso Capital Corp (NASDAQ:BKCC), Kohlberg Capital (NASDAQ:KCAP), Main Street Capital Corporation (NYSE:MAIN), PennantPark (NASDAQ:PNNT), Prospect Capital (NASDAQ:PSEC), Solar Capital (NASDAQ:SLRC) and Triangle Capital Corp (NYSE:TCAP).
- Take the list of stocks as before and make the "reinvestment" decision a variable based on the yield. If the current dividend yield of the stock is greater than or equal to a yield limit, then reinvest that dividend. If the current yield is below a threshold, pocket the dividend.
- Run each of the stocks for the same intervals as the previous study (Inception, 5 Years and 2 Years) with a threshold that ranges from a 1% dividend yield up to a 20% dividend yield.
- The time period runs from the interval date until 8/29/2011 inclusive.
- For each interval, pull out the dividend yield threshold that resulted in the highest return. The resulting chart is displayed below:
As you can see, adding in the decision option produced superior returns for all dividend paying stocks than the previous yes/no reinvestment study. The average return increased by an amount of 22%. As an example, KCAP had a -28% return with reinvestment in the first study. By running through the different yields, the loss is reduced to -18% when dividends were only reinvested at a 10% or greater yield (for ACAS the result was unchanged as the stock has not been paying regular dividends since 2008). The best yield since inception to base your reinvestment decision on was 9% and for the past 2 years, 10% was the optimal yield. There are three outliers to this rule: MAIN, PNNT and TCAP who have managed to provide compound returns to investors as long as they are paying a dividend.
Disclosure: I am long AINV, ARCC, PSEC, TCAP.